Spain bailout 'due over weekend' - but only for the banks

Madrid is expected to ask EU for money to help its banks - but it will not be a full state bailout

LAST UPDATED AT 13:24 ON Fri 8 Jun 2012

SPAIN is expected to make a request over the weekend for a financial package to prop up its troubled banks, according to senior European Union officials and one German source, reports The Independent.

"The government of Spain has realised the seriousness of their problem," a senior German official said. He added that an agreement had to be reached before a Greek general election on 17 June which could cause market panic and lead to Athens leaving the eurozone if parties opposed to the terms of an EU and International Monetary Fund bailout win.

It has been estimated that the Spanish banking system could need around €60 billion pumped into it in order to restore some stability. Although some fund managers expect Madrid to do this, rating agency Fitch believes "severe stress" may warrant a far larger bailout, one that could run to around €100 billion.

"Spain's high level of foreign indebtedness has rendered it especially vulnerable," Fitch said, as it announced its decision to cut Spain's credit rating by three notches to 'BBB'.

An IMF report, due to be published on Monday, is expected to estimate Spanish banks' capital needs at a lower figure of €40bn, but market conditions have deteriorated since that data was collected, officials said. European shares and the euro fell today amid mounting concern over Spain related to the Fitch downgrade.

While Spain would join Greece, Ireland and Portugal in receiving a European bailout, officials said the aid would be different in that it would be focused only on the country's banking sector, without taking cutting the Spanish state off from credit markets.

Any political conditions would not be onerous, related only to the banks and would probably not add to the austerity measures and structural economic reforms which Prime Minister Mariano Rajoy's government (pictured) has already put in place, EU and German sources said.

However, a Spanish government spokeswoman said she was not aware of any pending announcement on a bank rescue over the weekend. The spokeswoman referred to Rajoy's comments on Thursday that he would wait to see the results of the IMF's audit of the banking system on Monday before talking with Europe over the best course of action to recapitalise the banking system.